I didn’t think I’d be that type of spectator. I usually half watch basketball games on TV while doing work or scrolling on my phone. But at this recent elementary school basketball game of 10 year olds, I was all “who you covering?” and “get the rebound!”. When they passed, assisted and scored, I screamed and cheered. Foul shots became nail biters. Emotions are real when your personal investment is out on court.

We are in the home stretch of the year, and the rally we have seen since the end of October is also slowly making next year a nail biter. 

On one hand, the markets are back up around the highs because:

• The 10-year treasury rate is a little lower → because inflation is lower than it was (3.2% vs 6.9% this time last year) → because growth is slowing down.

• Employment data is still strong.

• Sentiment was supportive: investors had moved cash to the sidelines in the September-October market drop, and bullish investor sentiment had dropped close to the lows for the year. These things can be thought of as a contrarian signal.Their presence is supportive for markets once they start turning around because they mean investors might want to jump back in—like in November. See chart below.

On the other hand:

• Inflation is now cooling, because growth is slowing.

• The things that drove interest rates higher earlier in the year, such as a recognition of the high US government deficit, are not gone.

• Q3 earnings were disappointing relative to expectations, and earnings expectations for 2024 are pretty high.

• Investor sentiment hasn’t been this high since March 2021. As a contrarian signal, it’s not positive for the markets.

My main worry is really that this rally has pulled the potential for a strong start to the markets in 2024 forward to today, leading next year to a weak start. It’s really dependent on the future of inflation, growth, and the labor market. We’ll get some data over the next week that could provide the needed pick to support the market’s current roll:

• On Friday 12/8, November employment data will drop. Consensus is for 180K job additions, up from +150K in October, rebounding due to the end of the United Auto Workers (UAW) strikes.

• The inflation report for November is due out on 12/12 and is expected to be unchanged at +4% year-over-year for core services.

• The Fed’s next interest rate decision is on 12/13, where they are expected not to raise rates. They’ll also provide their projections for future rates.

Despite this nail-biter sentiment for the start of 2024, I think we could get the rebound later in the year, after the potential bad news is all out.